Retail Leases Amendment Act 2020 comes into force

The Retail Leases Amendment Act 2020 (the Amending Act) received royal assent and passed into law in Victoria yesterday (22 September 2020).

First tabled in Parliament back in October 2019 before being delayed by COVID, the Amending Act makes a number of changes to the Retail Leases Act 2003 and the Building Act 1993. Essential Safety Measure changes come into effect 23 September, the balance of changes come into effect 1 October 2020.

This article is longer than intended – the changes, although apparently only minor, are in some cases subtle and more significant than they would appear on first glance. We have set out the key changes first, and some additional commentary on them second.

The key changes

Security Deposits

These changes apply to leases already in place

The Amending Act amends section 24(1)(d) of the Retail Leases Act, now requiring a landlord to return any security deposit to the tenant within 30 days of the end of the lease provided the tenant has performed all of their obligations under the lease. This replaces the previous requirement, which was merely that any security deposit be returned “as soon as practicable.”

Disclosure Obligations

Prior to the Amending Act, landlords were required to give a tenant a disclosure statement and copy of the proposed lease at least seven days prior to the lease commencing, but the consequences of non-compliance with the seven day requirement were virtually non-existent.

This has now been amended to require a disclosure statement and draft lease be provided 14 days prior to the commencement of the lease and to amend the commencement date of the proposed lease to be 14 days after disclosure is given.

The Amending Act also requires that, for the purposes of disclosure, the proposed lease now must be particularised with details of the rent, the term and the tenant’s details (so an agent cannot be armed with a pro-forma proposed lease during negotiations as has previously been practice).

If a proposed lease is given to a tenant and contains any changes to a previous proposed lease then the landlord must notify the tenant of the changes.

The legislation is ambiguous but it would seem that the 14 day period will commence from the date the final copy of the proposed lease is given to the tenant (even if amendments have been borne out of negotiations and requests by the tenant).

The Amending Act also removes the word ‘substantially’ from section 17(7) (so new disclosure will be required where a lease follows an agreement for lease if the lease itself is on any different terms to the agreement for lease).

Essential Safety Measures

The most relevant changes brought in by the Amending Act for most landlords and tenants will be the amendments in relation to charging for Essential Safety Measures (ESMs). Following a 2015 advisory opinion from VCAT, the generally accepted position has been that the costs of ESMs are not able to be passed on by a landlord to tenants under a retail lease. This position is now reversed by the Amending Act.

The Amending Act amends the definition of outgoings that may be paid by a tenant to include “the cost, or part of the cost, of repairs or maintenance work in respect of an essential safety measure.” It also amends the Building Act 1993 to remove a tenant’s right to withhold rent in respect of expenses incurred complying with ESM obligations.

The cumulative effect of these changes is the reversal of the existing position with regards to ESMs.

The Amending Act also inserts a new Part 15 into the Retail Leases Act 2003 that makes these ESM amendments retrospective and applicable to existing retail leases. This Part means that any clause in a retail lease entered into before the commencement date of the Amending Act that allows ESMs to be passed on to tenants will be effective.

The costs themselves may not be backdated and may only be sought from a tenant from the 23 September 2020. Landlords under a lease that allows them to recoup the cost of ESMs will still have to pay for those costs incurred before the commencement of the Amending Act.

Changes to renewal process

Notice of last date

These changes apply to new leases and to leases already in existence unless the last date to exercise the option is earlier than 1 January 2021 (previously this article indicated changes would apply where the lease ended at any time after 1 January 2021)

The Act previously required landlords to notify tenants of their last date to exercise an option at least 6 months and no more than 12 months before the last date. That has now been amended to no less than 3 months prior to the last date to exercise.

The wording of Section 28 in this regard has been amended from requiring a landlord to “notify” the tenant, to requiring the landlord to “give the tenant written notice” – we refer to our article here: https://www.easternbridge.com.au/post/when-notice-is-more-than-sending-a-notice in relation to the significance that was previously attributed by the Courts to the word “notify”; that word has now been removed.

The notice must also set out a proposed rent for the first 12 months and details of early rent review process and cooling off options together with an updated disclosure statement. These are more onerous requirements than previously applied.

Tenant’s new rights after notice

Once the notice referred to above has been provided to the tenant, the tenant may request an early rent review within 28 days – that will see the ordinary rent review provisions applied and, if the matter is referred to a specialist retail valuer, the time for the tenant to renew extended until 14 days after rent is determined.

The term of the lease will be extended as necessary to allow the tenant that 14 days and, if the tenant does not renew, the term of lease will be extended to end three months after the tenant's amended last date to exercise option (to allow landlords and tenants time to make alternate arrangements).

If a tenant is eligible for but does not request an early rent review and otherwise elects to renew the lease, that tenant now has a 14 day period within which to ‘cool-off.’ If they elect to exercise their cooling off rights, the renewed term of the lease will not apply and the existing term is extended by 14 days.

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Some thoughts -

Changes to disclosure requirements

From a practical perspective the 14 day requirement on disclosure (and forced delay of commencement date) presents real difficulties – it is not uncommon for tenants to want or need leases to commence very shortly after agreement is reached.

The 14 day commencement delay impinges parties’ ability to move quickly in the market. The changes might also see amendments to the lease as a result of ordinary review and negotiation set the commencement date back by 14 days – this is likely to lead landlords to refuse to engage in negotiations on terms of lease and leave tenants pressured to accept leases on an ‘as is’ basis in order to achieve their desired commencement date.

Essential safety costs

The major area for concern in this Act is the imposition of essential safety charges on retail tenants and the retrospectivity of that change. The Act effectively punishes tenants that have previously relied on the state of the law. Our view on this point is the subject of a separate article here: https://www.easternbridge.com.au/post/retail-leases-amendment-bill-2019-legislative-risk-to-retail-tenants

In essence, many tenants have had their safety net removed by retrospective legislation. Moreover, the Act now rewards landlords that previously sought to pass on costs when they were not entitled to do so (and punishes landlords that did the right thing by amending leases to remove those costs).

Early rent review process

The drafting of the early rent review process is haphazard, for instance:

• it seemingly requires a tenant to see the matter referred to specialist valuation (instead of continuing what might otherwise be productive negotiations) if the last date to exercise would otherwise pass (the extension of time for a tenant to exercise its option applying only if a specialist valuer is appointed); and

• although extending the term for the purposes of ensuring the time limits for the tenant to exercise its option do not expire after the end of the term, the provisions do not then deem the renewed term to commence at what would have been the original expiration date (as was previously the case under a lease extended by the operation of Section 28 of the Retail Leases Act).

The efficacy of this provision more generally remains to be seen.

Jack Kelly

Lawyer

Paul Nunan

Director

Accredited Specialist | Commercial Leasing